A Maverick of the Utilities Space

When it comes to electric utilities, investors have several types to consider. Some are primarily energy distribution companies, such as Consolidated Edison (ED), Northeast Utilities (NU) and NSTAR (NST). Others are pure independent power producers like GenOn Energy (GEN), Calpine (CPN) and Dynegy (DYN). Still others are the large integrated utilities like Dominion Resources (D), Duke Energy (DUK), Southern (SO) and NextEra Energy (NEE). And then, there is AES (AES)

AES started life as the brainchild of two former federal employees. Roger Sant came from Jimmy Carter's Federal Energy Administration, the forerunner of today's Energy Information Administration. Dennis Bakke came from Carter's Office of Management and Budget.

In 1981, Sant and Bakke co-founded the Washington-based consulting firm called Applied Energy Services. Over 10 years, their consulting company became an independent power producer. They went public in 1991 as The AES Corporation.

AES was not a typical utility. Sant and Bakke deviated from utility norms and developed a unique corporate culture. According to AES's 10-K form, filed in 2001 with the Securities and Exchange Commission, AES's mission is serving the world by providing safe, clean, reliable and low-cost electricity while adhering to four key principles:

1. Integrity: AES strives to act with integrity, or wholeness.

2. Fairness: AES wants to treat fairly its people, its customers, its suppliers, its stockholders, governments and the communities in which it operates.

3. Fun: AES desires that people employed by the company, and those people with whom the company interacts have fun in their work.

4. Social Responsibility: AES believes that doing a good job at fulfilling its mission is socially responsible. But the company also believes that it has a responsibility to be involved in projects that provide other social benefits.

In the beginning of AES's second decade, the company found itself operating in 29 countries, controlling 60 power plants and marketing approximately 42,100 megawatts of generation. Of the 60 power plants, AES owned 17 located in the U.S. They controlled 16 power plants in Central and South America and 17 more power plants in China, Kazakhstan, Pakistan, India and Australia. AES also controlled 10 plants in Europe. While managing this rapidly growing fleet, AES had under construction 7,600 megawatts in countries as diverse as Sri Lanka, Bangladesh, Dominican Republic and Panama.

In additional to power plants, AES accumulated interests in electric distribution companies in remote places such as Tbilisi, El Salvador, Brazil, Argentina, Kazakhstan and Pakistan. These distribution companies provided electricity to approximately 17 million retail consumers.

In early 2001, AES had become the world's largest independent power generator, and one of the first "utility companies" intentionally designed to expose investors to speculation. Traditionally, utilities have never exposed their shareholders to speculation, and have always attempted to hedge any risk or potential risk. But AES was a different type of utility, and its shareholders were as well.

A few months into 2001, AES learned how much risk its shareholders assumed when the company found itself shaken to its foundations by four unexpected shocks. The first was the Californian power crisis of 2001. The second was Enron's collapse. The third was the simultaneous meltdown of the Argentine economy, a crisis in Venezuela and the consequential effects on AES's interests in Brazil. Finally, the aftermath of the Sept. 11, 2001 attacks created significant uncertainties because AES had ongoing operations in Muslim countries.

Following these shocks, AES was forced to undertake major adjustments. AES now operates under a different management team and corporate culture. The new team shifted company's portfolio of assets and moved to reduce shareholders' exposure to risk. They migrated towards the traditional utility model of managed risk.

Management shifted the company focus from the wildcat business of independent generation toward the safer businesses of distribution utilities and of owning wires. By 2010, approximately 55% of AES's revenues and 62% of its margins came from electric-distribution companies.

Today, three countries provide AES with 63% of its revenue: Brazil, the U.S. and Chile. No other single country exposes AES's shareholders to more than approximately 5% revenue risk.

This week, AES reduced shareholders' risk even more. It completed the acquisition of its second U.S.-based utility, DPL, and its subsidiaries -- Dayton Power and Light Company and DPL Energy Resources. This acquisition further reduces shareholder risk by moving sources of revenues toward safer sectors -- that is, distribution companies located in the U.S.

In many ways, AES is still a maverick. It has significant exposure to international power generation and distribution. Unlike most utilities, it pays no dividends and relies on the speculative-minded investor. Most important, unlike many pure independent power-producing utilities, AES can once again deliver bottom-line results.